This is a question that has been asked of me a thousand times over the years and basically the answer is the same in Australia and it is in New Zealand.
In this article one of Australia’s top commentators on real estate discusses the merits of old vs new with respect to property investment.
Go for it Michael
In spite of the battering that the residential market has taken of late, many Australians still aspire to own investment property.
When considering whether to buy new versus older property, price is only ever part of the equation.
And buying a new dwelling has numerous benefits over buying a second-hand property.
One important benefit that new homes offer investors is great capital depreciation, with up to 60% of the built cost being tax-deductible over time.
When considering a brand new investment property, and in particular, when deciding to build or purchase off the plan, it is wise to obtain advice from a depreciation specialist as early in the planning stages as possible.
That way, an investor will be aware of the best choices to make in order to maximise depreciation benefits.
For example, when a property is being built, the selection of fittings and fixtures will determine their dollar value in terms of depreciation deductions.
And this, in turn, will make a difference to the cash flow potential of a new investment property.
Let’s look at floor coverings by way of an example – carpet, versus timber floorboards, versus tiles. For depreciation purposes, each of these is deemed to have an effective life. Carpet – 10 years; timber floorboards – 15 years; and tiles – 40 years.
A $2,000 outlay on floor coverings, for example, would result in the following depreciation benefits in the first year: Carpet – $400; timber floorboards – $267; and tiles – $50.
Similarly, for a $2,000 expenditure on lighting, ornamental lights with a five-year effective life would incur an $800 depreciation benefit in the first year, versus down lights with a 40-year effective life and a $50 depreciation benefit in the first year.
And naturally, depreciation benefits continue in subsequent years until all amounts are exhausted.
Armed with this sort of knowledge, an investor might find it financially viable to upgrade a level of finish from, say, low to medium or medium to high.
But it takes an expert in the field to keep up with the machinations and new methodologies of the ATO, and to structure depreciation schedules that will maximise benefits for owners.
These days, for example, renovating is on the rise. And what some new or would-be investors may not know is that they can claim deductions for an old property that is scrapped.
When building a new investment property and tearing down an old home, items that are scrapped or removed, such as carpet, air conditioning units, stoves etc, may have left over value that can be claimed as a tax deduction in the year of removal.
The same applies to the qualifying structural element of the property. But the important thing is to obtain a tax depreciation report pre-demolition, in order to be eligible for any savings at tax time.
Depreciation is basically a numbers game, but with a twist. Broadly speaking, most of a building is claimed at 2.5% per year for 40 years, however, up to 25% of the total construction cost can be written off more quickly.
Good luck with that investment.